How Car Insurance Could Actually Convince Us to Drive Less

We can't afford not to love Big Brother. At least when it comes to car insurance.

Lots of markets deal with some kind of market failure, and car insurance is no exception. Insurers have a big problem. They know a lot about us, but they don't know a lot about how we drive. Sure, they know when we get tickets or when we get into fender benders, but they don't know how much or how fast or how aggressively or how attentively we drive. They have to use proxies like age, sex, marital status and where we live to price policies. The end result are higher premiums than most of us should be paying.

But now there's a solution for those 93 percent of drivers who think they're above average. As Randall Stross of the New York Times reports, car insurance companies are offering customers a trade: less privacy for lower premiums. Drivers who install a monitoring device that records when, how far, and how fast they drive -- but not where -- are eligible for discounts of up to 30 percent. The average saving from Progressive, which pioneered the program, is 10 percent. Other insurers are getting in on it too.

Saving money is nice, but what about saving the world? Well, it does that too. Monitoring doesn't just tell car insurance companies how we drive, but how much we drive -- and that's a big deal. It's intuitive enough that our chances of an accident go up as our mileage goes up, as the chart below from a 2008 Hamilton Project paper shows.

Look at that chart again. It's so simple and so profound. Car insurers have an incentive to charge people more who drive more, since those drivers are more likely to make a claim. In other words, insurers want to put a price on driving. That's just another way of saying they want to put a price on gas. If this sounds like a backdoor gas tax that works in reverse, that's because it is. It puts more money in people's pockets for driving less rather than taking it out for driving more -- which is a distinction without a difference. A disincentive to drive is a disincentive to drive. And disincentivizing driving is something with enormous spillover benefits -- what economists call positive externalities.

Let's add up the positive externalities. The Hamilton Project estimates charging by the mile would reduce driving by 8 percent nationally, which is roughly the same reduction an extra $1-a-gallon gas tax would achieve. Less driving means less oil used and fewer carbon emissions -- 4 and 2 percent less, respectively. It also means less traffic and fewer accidents, which saves us another $50-60 billion (in 2008 dollars) or so. Those savings mean we save too -- an average of $270 a year, skewed towards lower-income households that tend to drive less -- since insurers will have fewer accidents to cover. That's a lot of winning.

Ask not what car insurance can do for you. Ask what it can do for the country and the climate. A lot, it turns out.